Chapter 14

Long-Term Liabilities

Directed Reading Guide

LO1. How are long-term notes payable and mortgages payable accounted for?

1. In your own words, what is a long-term liability? Long term-liabilities are liabilities that do not need to be paid within one year or within the entitys operating cycle, whichever is longer. Both long-term notes payable and mortgages payable are common long-term liabilities.
2. To record the purchase of a building for $150,000, paying $100,000 in cash and signing a 30-year mortgage at 6% for the balance, the journal entry would be:

Date	Accounts and Explanation	Debit	Credit

LO2. What are bonds?

1. In your own words, what is a bonds payable?
2. ___Debentures__________ are unsecured bonds backed only by the credit worthiness of the bond issuer.
3. _____Secure Bonds________ are bonds that give bondholders the right to take specified assets of the issuer if the issuer fails to pay principal or interest.
4. ___Serial Bonds__________ are bonds that mature in installments at regular intervals.
5. ____Term Bonds_________ are bonds that mature all at the same time.

LO3. How are bonds payable accounted for using the straight-line amortization method?

1. Journalize the following:

1. A bond that has a face value of $100,000 but is issued for $95,000.
2. A bond that has a face value of $100,000 but is issued for $106,000.

Date	Accounts and Explanation	Debit	Credit
1)
2)

LO4. How is the retirement of bonds payable accounted for?

1. When a bonds payable is retired at maturity, the journal entry is a debit to ________________ and a credit to ________________. LO5. How are liabilities reported on the balance sheet?
   1. Identify if the liability would be classified as a current liability (CL) or a long-term liability (LTL) on the balance sheet.

1. Bonds Payable _________
2. Accounts Payable ________
3. Mortgage Payable _________
4. Accounts Payable ________
5. FICA taxes ________

LO6. How do we use the debt to equity ratio to evaluate performance?

1. What is the formula for debt to equity ratio?
2. If total current liabilities are $10,000, long-term liabilities are $20,000, and total equity in the business is $40,000, what is the debt to equity ratio?